What Are “Gamma Squeezes” and How Do They Relate to Investor Psychology in Options Markets?

A gamma squeeze is a rapid price rally fueled by investor psychology and options market mechanics. It typically begins when a large group of retail investors, often driven by hype or FOMO (fear of missing out), buys a massive volume of short-dated call options.

To hedge their positions, market makers who sold these options must buy the underlying asset. This buying pressure drives the price up, which in turn forces them to buy even more of the asset to maintain their hedge, creating a powerful, psychology-initiated feedback loop.